Trading electronically

Do I have to tell you if I am electronic trading?
E-commerce issues
Website costs
Domain name trading
Record keeping

Do I have to tell you if I am electronic trading?

If ...	then ...
you are already in business	you do not need to advise us if you begin internet trading, and the internet trading will form part of your normal business operation and should be accounted for as part of that business.
this is a new business	you need to contact us to ensure you are correctly registered for GST and know your obligations. Even if you only intend to provide exports that are zero-rated for GST purposes, you may still need to register for GST. business tax information officers located at most sites can provide help and support for you. They will explain your tax obligations.

E-commerce issues

There are various issues and conventions surrounding the treatment of income made overseas that you need to know about.

Permanent establishment

New Zealand is a member of the OECD and has been involved with other member countries in addressing international issues relevant to e-commerce.

An OECD report "Clarification on the Application of the Permanent Establishment Definition in e-commerce" released in December 2000, concluded that a website does not in itself constitute a permanent establishment, but a server could be a permanent establishment if it is an essential part of an online business activity.

The decision means internet service providers or New Zealand businesses who own servers overseas and conduct all their business online may have to file tax returns in the country where their equipment is based, even if the business does not base staff there. However, New Zealand tax residents are required to return their worldwide income for New Zealand tax purposes.

The report is still considered to be current.

Contracts made online

Because of the nature of electronic trading, contracts are made without paper.

The time and place of offer and acceptance of the contract may be different from conventional treatment and this may need to be considered to work out the correct tax effect.

Generally an advertisement on a website to sell a product is an "invitation to treat", followed by an "offer to buy" from the potential purchaser, and acceptance of the offer to buy, by the seller. The contract is finally made where and when the acceptance by the seller is communicated to the potential purchaser.

The default time and place rules on electronic communication are addressed in the Electronic Transactions Act 2002.

Attribution of profits between different countries

In some cases part of any profits earned may be considered to be derived from two countries and there may need to be an attribution of the profits between both countries for taxation purposes.

The OECD has released two discussion papers on this topic.

Inland Revenue has not taken a position on either of the papers as they are still under consideration.

Software/royalties

Inland Revenue's published position about the income tax treatment of software can be found in Tax Information Bulletin (TIB), Vol 15, No 11 (November 2003), pages 8-24. The main points are reproduced in Royalties and non-resident withholding tax.

Banner space advertising and barter

Banner advertisements are frequently placed on a website to advertise a product from, or link to, another site. Commissions received from banner advertising are taxable income while commissions paid for business advertising are deductible.

In some cases the advertising is by a reciprocal arrangement between sites by contracts or barter. There should be an open market value placed on the value of the goods supplied and received by barter, which may mean that in most arm's-length situations the tax effect is neutral.

Timing of income

Where a New Zealand business sells digital products via an overseas ISP it may be necessary to consider transactions completed near year-end to ensure correct income treatment. For example, if a website is hosted on a United Kingdom ISP and the New Zealand business has a 31 March balance date, contracts "completed" between 12.01 midday and 12.00 midnight United Kingdom time on 31 March would be considered income for income tax purposes in New Zealand on 1 April.

Website costs

Website costs can only be deducted for tax purposes if you incur them deriving gross income for business purposes.

Are website costs deductible or depreciable?

The following table gives a quick reference to whether a cost is deductible, depreciable or neither. You can find full details about website costs in the Tax Information Bulletin (TIB), Vol 12 No 8, August 2000 (pages 21 and 22).

 

Cost	Deductible as an expense	Depreciable as a capital expense
Registration of domain name	No	No
Purchase of domain name	No	No
Annual fee for registration	Yes	No
Renting space on an ISP server	Yes	No
Site design costs	No	Yes
Site update costs	Yes	No
Reconstruction, upgrading or functional improvement to website	No	Yes
Cost of a server (computer)	No	Yes

Domain name trading

What is the tax treatment of selling domain names?

If you register and/or purchase domain names with the intent of selling them, then any profit on the sale will be taxable.

If you are in the business of registering and/or buying and then selling domain names, the domain names on hand at your balance date would be considered trading stock.

Valuation of trading stock

Trading stock must generally be valued at cost. When the market selling value of trading stock is lower than cost then the stock can be valued at its market selling value. Stock can also be valued at replacement or discounted selling price (these are cost valuation methods).

What information do I need from international customers?

An email address by itself does not provide sufficient evidence that the customer is outside New Zealand.

For GST purposes (zero-rating sales made to customers overseas), you need sufficient evidence that the customer is outside New Zealand and therefore that the transaction can be zero-rated.

Find out more

For more information about supporting evidence suggested, see double taxation.

Tax treatment of electronic trading in other countries

It is unlikely that simply buying goods from another country will make you liable to pay tax in that country.

If ...	then ...
you are selling goods overseas	it is unlikely that by simply selling goods electronically through a website located in New Zealand to customers in another country, you will be liable to tax in that country.
however, the income from selling these goods has a source in the overseas country and there is no double taxation agreement	that country may seek to tax the income.
you do carry on any other activities in that other country	you may have taxable presence there. Eg, if you own and operate a server in that country you may be liable for tax there. This approach follows the OECD report on Permanent Establishment.

What currencies can I use when dealing with customers from overseas?

You can deal in any currency.

When preparing returns for New Zealand tax purposes, the trading must be converted to New Zealand dollars. This includes GST and financial accounts.

You can find exchange rate conversion calculators under Work it out >

Find out more

See our business model examples.

Record keeping

• You must keep sufficient records to make complete and correct tax returns. This includes records of sales and purchases made electronically.
• All records must be retained in New Zealand, unless, after written application, permission is given for them to be outside of New Zealand.
• You also need to be able to demonstrate in response to our enquiries that you have kept sufficient records.
• Generally business records must be kept for at least seven years after the end of the year to which they relate. This includes electronic records.
• Payroll records for employee wages and costs must also be retained for seven years.

Electronic records

Hard copy

You do not have to retain electronic records on hard copy.

All information contained in the original transactions must be able to be recovered and presented.

Encryption

You can keep records in encrypted form for security.

You must make sure that you can recover the original information in an unencrypted form so that you can complete and file a correct tax return.

Software

You can use whatever package suits your business.

If you make hardware or software changes:

• the facilities for retrieving electronic records that have been stored on the former system must be retained, or
• the electronic records must be converted to a compatible system and both sets of files retained, complete with documentation, showing the method of transfer and controls in place to ensure the transfer was complete and accurate.

Find out more

See the Retention of business records by electronic means in Tax Information Bulletin (TIB) Vol 15, No 12 (December 2003).

 

Date published: 03 Dec 2007

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